GOLDMAN: Here Are Our Top 7 Trades For 2013

Goldman Sachs has released its top seven trade recommendations for clients in 2013.We have already highlighted two of the trades as they’ve been released over a period of days.

The trades aren’t for everyone and some of them are pretty technical.

But they offer a very intimate look at what Goldman Sachs sees for the world next year.

The common thread throughout the trades: 2013 is the year of risk-on.

Go long the Wavefront GDP Growth Basket

Originally introduced: August 13

Target return: 10 per cent

The trade: This is basically a risk-on bet on the U.S. stock market. Goldman's proprietary 'Wavefront GDP Growth' basket is comprised of long positions in cyclical stocks from the materials, industrials, and consumer discretionary sectors and short positions in more defensive stocks from sectors like consumer staples and healthcare.

The logic: Goldman is bullish on the U.S. economy in 2013 and thinks the stock market should therefore see a rotation into cyclical stocks as growth accelerates and investors seek higher returns from riskier assets.

Originally introduced: December 10

Target return: 4 per cent

The trade: 'FX Current' is another proprietary Goldman basket. Investing in it involves taking long positions in currencies of countries running current account surpluses, funded by currencies in countries with account deficits.

The logic: Goldman strategists write, 'When the global macro and policy outlook becomes more uncertain, cross border capital flows tend to slow temporarily, often leaving a large current account deficit or surplus as the primary drivers of the FX market.' In other words, countries running big external deficits could face currency depreciation risks.

Go Long Large Cap US Banks

Originally introduced: December 7

Target return: 20 per cent

The trade: Invest in the KBW Bank Index (ticker BKX), comprised of stock in several of the biggest U.S. banks.

The logic: This is another risk-on bet on the U.S. economic recovery in 2013. Goldman notes that U.S. banks lagged housing stocks as a rebound in U.S. housing took place in 2012. However, Goldman expects some of that improvement in housing to pass through to bank balance sheets in 2013.

Go Long Spanish Sovereign Bonds

Originally introduced: December 6

Target return: 8 per cent

The trade: Invest in 5-year Spanish government debt with a target yield of 3.5 per cent.

The logic: Goldman says that although they predict further contraction in the Spanish economy in 2013, their valuation models suggest that Spanish bonds are undervalued relative to German bonds. Furthermore, it seems like bank creditors will take the hit in the Spanish bank bailout as opposed to adding the debt to the sovereign's balance sheet. In addition, 'the prospective transformation of Euro area official sector loans to support bank recapitalizations into bank equity will work in the same direction.'

The Commodity Carry Basket (Crude, Corn, and Base)

Originally introduced: December 5

Target return: 12 per cent (in the next 6 months)

The trade: Invest in S&P's GSCI Petroleum and GSCI Corn indices; go long GSCI Copper versus a short position in GSCI aluminium

The logic: Goldman thinks backwardation in commodity curves -- wherein short-term futures contracts are more expensive than longer-term contracts, will allow investors to profit from selling contracts one month and buying back the next month's contract at a lower price, while keeping the same underlying commodities position. Goldman expects short-term demand pressures to keep near-term futures prices high, while increased supply in the long-term will bring down the price of longer-dated contracts. For a more in-depth explanation of this trade, click here >

Go Long Risk on High Yield Credit Default Swaps

Originally introduced: November 19

Target return: 4.9 per cent

The trade: Short the CDX HY Series 19 credit default swap index, targeting a tightening of the spread to 450 basis points.

The logic: Shorting credit default swaps is analogous to investing in the underlying assets that the swaps reference because the default protection the swap provides becomes less valuable as the company's debt becomes more expensive, meaning its borrowing costs fall, which makes it less of a credit risk. Monetary policy is forcing investors further out on the credit quality curve to search for returns from higher yields. Because the Fed and ECB's latest monetary policy actions don't seem to be changing any time soon, defaults should stay muted as investors pour into high-yield bonds, forcing down the cost to service debt for even shaky companies and thus lowering the chances of them being unable to keep up with payments.

Go Short the Aussie Dollar Against the Norwegian Krone

Originally introduced: December 3

Target return: 15.2 per cent

The trade: Go short the Aussie dollar and long the Norwegian krone, targeting a level of 5.00 on the AUD/NOK currency cross.

The logic: As Australia's economy weakens, Goldman expects the Reserve Bank of Australia to continue on a path of loose monetary policy, weakening the Aussie dollar. Meanwhile, because Norway is a relative safe-haven in Europe, owing to the negative effects of the euro crisis, Goldman says it will eventually need to allow the krone to appreciate, in light of high credit growth and increasing house prices there. For a more in-depth explanation of this trade, click here >